Category Archives: entrepreneurship

Cutting Audit Sampling Risk Down to Size: Automating the Sampling Process

Every Accountant professional at some point must take a sample. Sampling is defined as “the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class” according to Audit Sampling guideline AU Section 350. Essentially sampling is the process of examining a small portion of a client’s records to make a judgment on the credibility of the whole. One of the risks associated with this process is selecting a sample which is not an accurate representative of the whole. Samples which are done manually may seem random but fail to meet this rigorous standard. Think about it, random means lack of pattern. As humans we tend to stick to patterns and routines. An auditor may pick all even number selections or every third in an effort at randomness. In this situation the likelihood that gross errors in a client’s books will be missed are exponentially increased. Sadly, many audits rely on manual selections from an Excel spreadsheet. For example, let’s say an audit is needed on accounts payable transactions. The typical audit would involve selecting a sample number of vouchers and back track to the supporting documentation such as invoices and purchase orders. Using the automated Excel technique highlighted below can minimize sampling risk and increase productivity.

 

Using Excel a tool can be developed to automatically apply red highlights random general entries. In order to have Excel automatically select random journal entries, we first need to organize our spreadsheet into two tables like the one below. The first table will contain our journal entries and the second will help us select random entries.

Master List

 

Add Conditional Formatting

 Journal List

1. Highlight the list of journal entry id numbers

Conditional Format Menu

  1. Under the Home menu click conditional formatting > Highlight Cells Rules > More Rules

 

Edit Format Rule Menu

 

  1. Select the formatting Rule type titled “Format only cells that contain”
  2. Change logical condition to “equal to”
  3. Enter J3 cell address in the last box
  4. Click Ok

 

Note: This will check to see if any of the journal ids in column B match journal ids in Column J

 

Edit Format Rules

  1. Click on Conditional Formatting the Manage Rules

 Edit Rule Manager

 

 

  1. Click on New Rule
  2. Follow steps 3 and 4 entering cells J4, J5, J6, J7 in the subsequent conditional format rules

Sample Generator 7

10. An inventory of all conditional format rules should look like the picture above

11. Click Ok

 

 

Add Random Calculation Formula

Sample Generator 812. Enter the following formula in cell A3 =RandBetween(1,10)

 

Note: The RandBetween formula is called a volatile function. This means the result constantly changes. This particular formula will give a random result between 1 and 10. Press F9 to see the result change.

Sample Generator 9

 

13. Copy the RandBetween function into the cells A4 through A12


Add Vlookup Formula

Sample Generator 10

14. In cell J2 type in =Vlookup(I3,$A:$B,2,false)

15. Copy this formula from J4 through J7

The Result

Sample Generator 12

16. Red highlights will be applied to the journal entries which appear with a selection number  between 1 – 5

17. Press F9 to select another random sample

Note: In some instances a cell in the Selected Journal Entry column may appear with #N/A. This means the selected sample number has not been found. Press F9 again to get another sample.

 

Bigger and Better

 

What if you’re working with more journal entries and need a larger sample. How can this approach be adjusted to accommodate? In order to apply this technique to a sample size of 25 we would need to make three adjustments to our spreadsheet:

1. Add more journal entries to the Journal Entry Master List

2. Revisit steps 2 – 8 for conditional formatting and enter cells J8 to J28. This will give the ability to select 20 more samples.

3. Change the RandBetween formula that appears in each cell in column A from RandBetween(1,10) to RandBetween(1,25).

4. Extend the helper table which contains the columns titled Selected Samples and Selected Journal Entry 20 more rows. The column titled Selected Samples should go from 1 to 25. Copy the vlookup formula down 20 rows.

 

This combination of tools is one of many techniques which can be used to simplify and reduce risks in the auditing process. To view a demonstration of this tool in action visit

youtu.be/zXqd-T_14fE.

Never Update the Pivot Table Source Range Again

Pivot tables are one of the most helpful tools in Microsoft Excel.  I literally use it everyday for the various projects I work on.  One of the crucial steps when working with a Pivot Table is to update your source range.  Updating a source range is needed when new data is added.  This is an easy step to forget when you are working on multiple time sensitive projects.  There are two ways to get around this issue.  The first technique is to transform the source range into a table.  A table is a way to tag a group of cells in Excel.  To change a group of rows and columns to a table do the following:

Range

 

Range2

1. Click Insert

2. Click Table

Select Table Range3. Specify the data range of the table

4. Click Ok

Range to Table

5. The source range has been transformed into an official Excel table

The next step would be to create a pivot table and specify the table range.  Excel will automatically recognize that this is a special “table”.  Now any additional rows or columns  you add to the table will be automatically carried to the pivot table.  All you have to do is refresh the pivot table.  Tables are handy tools which have other benefits as well.  We will share another approach on how to automatically update a source range in our upcoming class. Register here.

 

 

 

 

Excel in Financial Planning and Forecasting

Recently I read this articled titled Excel in Financial Planning and Forecasting: The old same problem for CFOs.  This was a great post which summarized the wide spread usage of Microsoft Excel in the area of financial planning and forecasting. In short, “43% of respondents use Microsoft Excel for financial planning and budgeting”. According to the article In spite of the high usage of Excel many survey respondents had some concerns about using this tool.   Amongst the concerns were:

  • Inability to preform what-if Scenarios
  • Inflexibility of Excel
  • Not friendly to users
  • Lack of skilled staff to perform the task

Many of the highlighted reasons stem from the limited Microsoft Excel expertise available in many organization.  Skilled staff should be able to create a financial model that solve the concerns above.  A financial model can be built to handle the planning and forecasting process in a seamless way.  What is a financial model?  Think of a model train.  The train model looks like a real train but may not have all of the components.  It resembles the real life version in some form or another.  A financial model is used to  forecast the impact on an organizations finances based on “what-if” scenarios.  Internal or external changes can be entered into the model to review the change on a business. The purpose of a financial model is to paint a financial picture, test various scenarios and support fact based decisions.  If this tool is built properly it can alleviate all of the concerns highlighted in the article above.  

In order to build a sound financial model a few things should be kept in mind.  The models that we have built in the past for institutions are the result of a through fact gathering process.  The process includes multiple discussions with key personnel, research on the specific industry and review of prior financial statements to name a few. As a result the models are more accurate, flexible and provide information quickly.  In order to build a good financial model below are  a few things which should be kept in mind: 

Build Ability to Test What-If Scenarios

Utilize tools in Excel like drop-downs and links to create the ability to test scenarios dynamically.

Design with Environment in Mind

In order to design with the environment in mind research the industry and key trends.  Include this information in the model.

Design with User in Mind

This is a key part of any software design.  Interview key stakeholders.  Who will be using the model? Who do they report to?  What type of information will they need to produce?  What types of ad-hoc request did they receive in the past?  What is the proficiency level of the primary user with Excel?  The answers to these questions and others will help in the design of a tool that is easy to use.

Outsource Design & Internalize Knowledge

Many organization lack the skilled staff to build such a tool.  In many cases it is ideal to outsource the development of the tool but internalize the knowledge associated with it.  For example, often after we develop a tool for an organization we provide training and documentation.  After this point key personnel are able to modify the financial model as the business changes or products\services are added.

Microsoft Excel has become the software of choice for planning and forecasting primarily due to its flexibility.  This same reason is a source of concern for many organizations which lack the skilled staff.  Outsourcing the design of a financial model can increase accuracy and speed up the planning and forecasting process.

 

 

Understanding Your Small Business Revenue

Over the past few weeks I’ve been attending FastTrac Growth Venture©.  This is a entrepreneurship program designed by the Kauffman Foundation to help revenue generating small businesses grow to the next level.  During one of the sessions each business owner took some time to dive into there revenue patterns.  Understanding revenue patterns is a critical piece of every business.  A good understanding of this line item can help business owners plan for cyclical slowdowns, identify high volume customers or lucrative products\services. Below are a few things you can implement in your business right away to begin to understand the revenue numbers:

Create a Cash Flow Analysis – Cash flow is the movement of money in and out of your business. Analyzing your cash flow can help you plan for late paying customers and slow seasons.  Analyzing your cash flow in advanced can help your business stay away from costly stop gap measures like a line of credit. An analysis tool can be created in a tool like Excel or by utilizing a stand-alone package like Quickbooks.

Create Revenue Slices – There are different ways to cut your revenue to discern patterns.  For example as a small business owner you can cut your revenue by client demographics, product\service type or  various time horizons to name a few.  Each slice tells a different perspective, together they tell a story about your businesses revenue.  These slices can be setup with a simple table in Excel.  The addition of trend visualization tools like sparklines can assist with identifying revenue patterns.  

Every business owner should understand the numbers, especially the revenue numbers.  In addition business owners should develop a plan to measure and provoke growth.  With the help of some of the techniques highlighted here small business owners can soar to new heights in revenue.